Tax Policy

Bartlett: Families Face Sharply Higher Marginal Tax Rates (SUMMARY)(TEXT)

Last week, President Clinton bragged that a typical family earning $25,000 per year now has the lowest tax burden in three decades. Clinton is correct.

  • A family of four earning half the median income -- roughly $27,000 -- will pay an average federal tax rate of just 7.14 percent this year -- for both federal income taxes and the employee's share of the payroll tax, according to the Treasury Department.

  • One has to go back to 1966 to find a year in which such a family would have a lower tax rate.

  • Last year the tax rate was 10.3 percent.

Although any reduction in the federal tax burden obviously is good news for families already struggling to make ends meet, it has come with a stiff price.

  • Although the average tax rate (taxes as a share of income) has fallen, the marginal tax rate (the tax rate on each additional dollar earned) has risen sharply (see figure).

  • According to the Treasury Department, a family of four earning half the median income will pay 43.7 percent in taxes out of its 27,001st dollar.

  • This is a rate almost twice that paid by a family with the median income.

This anomaly is caused mainly by the Earned Income Tax Credit (EITC), which Clinton greatly expanded in 1993. The EITC subsidizes earnings for low income workers, but is withdrawn as a family's income rises. This reduction in benefits is like a tax, creating high marginal tax rates.

Source: Bruce Bartlett (senior fellow, National Center for Policy Analysis), February 16, 1998.

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